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Palm reported strong demand for its Centro smartphone in the company's third business quarter, which ended on February 29. The Centro smartphone's unit sell-through for the period reached a record high for the company, executives said. But the 13 percent year-over-year rise in Centro sales failed to offset declines in other parts of Palm's business.

Palm's quarterly net income fell by 24 percent year-over-year to $312.1 million, and the company posted a net loss of $31.5 million. By contrast, the handset-maker rang up a net profit of $11.8 million in the year-earlier period.

"We've come through a tough quarter and continue to have a lot of work ahead of us," CEO Edward T. Colligan told investors. "But I am more confident than ever that we are on the right track to build long-term value."

Expanding Demographics

The usual pattern with a new product is an initial burst of volume at any individual carrier, which then fades over time as the product ages, Colligan noted. "With the Centro, however, we are seeing the opposite, with volume growing over time," Colligan said.

The Centro's key features and low price have also been compelling enough to persuade non-traditional customers to adopt smartphones, Colligan observed. "More than 70 percent of Centro buyers are proving to be traditional cell phone users who are buying a smartphone for the very first time," he explained.

Colligan believes that cell phones have become such an integral part of people's lives that they are probably the last thing that most individuals will be giving up. "We have all the power of a smartphone in a $99 package, so I think we're in a good space," he said.

Palm's CEO also points out that the company consistently sold more than 30,000 Centros per week during the third quarter, when the company's smartphone revenue reached $275.4 million on shipments of 826,000 units to wireless carriers AT&T and Sprint.

"We will be bringing more carriers on through the next couple of quarters globally, and we hope to see a similar success from those," Colligan told investors.

Gartner does not believe that a recession is going to impact the mobile phone sales volume in Western Europe -- reportedly one of Palm's target markets for the Centro. "But it might well impact value," said Gartner Research Director Carolina Milanesi.

"What I mean is that, in Western Europe, consumers might be going for midtier products that normally do not require a payment upfront and a longer and higher monthly contract, as is the case for high-tier phones."

A Product Refresh

Colligan admitted that Palm's overall sales have been hampered by the company's aging Windows Mobile handset lineup. However, Colligan announced that Palm will refresh its enterprise-class device family by summer's end.

"We will of course support Microsoft's latest offerings from an operating-system standpoint, which would in theory then support their back-end services in relation to device management, security and so forth," Colligan explained.

Palm is also faced with the problem of continuing declines in the traditional PDA business. "In most mature markets, the fourth quarter typically brings an increase in shipments to meet holiday demand, but this was not the case for the handheld device market," noted IDC's Senior Research Analyst Ramon Llamas.

"User interest has shifted away from handheld devices" to smartphones that can not only perform personal information-management tasks and other handheld functions, but also make and receive phone calls, "making it a better alternative for most consumers," Llamas said.